Monday, June 23, 2014

FERC Follies

The Monday lead editorial in the Wall Street Journal on a FERC (Federal Energy Regulatory Commission) story is revealing on the increasingly politicized nature of the American Regulatory State. Pulling the FERC story out of the editorial's larger point,

For 10 years Mr. Van Scotter has run a paper mill in the northern Maine town of Lincoln, population 3,000. [FERC Director] Mr. Bay accuses Lincoln Paper and Tissue of having manipulated in 2007-08 a federal program meant to promote energy conservation.... Lincoln Paper may be liable for a $5 million civil penalty and $379,016.03 in disgorgement, plus interest.

... Yet Lincoln Paper broke no known law....

Lincoln Paper chose to participate in "demand response" on the New England electric grid, where large power users were paid for the electricity they didn't use...Lincoln Paper had an aging steam-powered generator on site that supplied a minority of the mill's energy needs and took the remainder from the regular grid. Mr. Bay claims that Mr. Van Scotter intentionally ran this generator less than he normally would when the baseline was being created. Then he ramped the generator back up to make it seem as if he was drawing less energy off the meter and thus stealing the demand payments.
...

But...FERC never defined "baseline" and made no rules about the right way to set one or how equipment should be operated during the measurement period.

So how can Mr. Van Scotter be accused?

As Mr. Bay recently told the Senate in a letter, "the absence of a violation of market rules is not a defense to market manipulation..

The journal calls this "Orwellian." Catch-22 might be better. Under a FERC program, you can get federal money for cutting energy below a baseline. How do we compute the baseline? We won't tell you. But we can come after you later if we don't like what you did.

I found the last tidbit the most revealing.

...Lincoln Paper is entitled to no discovery during FERC investigations or even to know the identity of its accusers. Seven of the nine deposed witnesses remain anonymous under Mr. Bay's rules. He wants to play prosecutor, jury and executioner.

In the regulatory state, rights that we have had since about the Magna Carta dissolve.

With "baseline" undefined, surely lots of companies made, er, interesting computations to get Federal dollars. How did Mr. Van Scotter attract attention? Who did he not pay off, or do a favor for? Did he give to the wrong political action committees? Did he say something impolite about the FERC? The secrecy with which the FERC operates is an open invitation to this sort of abuse. (See, IRS.)

Keeping this kind of trouble at bay is how companies less "unsophisticated in the ways of Washington" now operate -- see big banks, health insurers, energy companies. Long and vague laws, authorizing longer and vaguer regulation, with few of the rights of the accused that legal proceedings involve, let politically-appointed regulators treat companies with capricious discretion. Threatening this kind of trouble is how Washington gains political support. Smart companies play along.

Fortunately, in this case, there is a legal remedy, though slow and expensive. Smart journalism still serves its disinfecting role, as the existence of the editorial attests. And eventually, one hopes, an outraged electorate will rise to demand change once it understands what "regulation" has become.

And eventually, one hopes, an outraged electorate will rise to demand change once it understands what "regulation" has become.

Oh John Cochrane.... the eternal optimist, and that is a good thing.However, Professor, Planet Earth calling here: Do you REALLY believe that the electorate will ever be outraged with these anecdotal cases? Life is too pleasant, too comfy watching my 60 inch flat screen TV drinking my Budweiser 6-pack, than to worry about what some ossified Soviet style bureaucrats are doing to a company far away.No professor, the electorate is too comfy, and the politicians too shrewd to give up their power - should it really ever happen, politicians will think of something to throw the electorate a little bone to keep them happy.I hope you are right - but if and when the electorate really wakes up to fight Leviathan, it will be too late; Leviathan will be too big to be fought.

"And eventually, one hopes, an outraged electorate will rise to demand change once it understands what "regulation" has become."

Hear hear!!!

P.S. Manfred -- I understand your frustration but, as Victor Laszlo said in "Casablanca", if we (those who have been given the ability to see the truth) stop fighting, we might as well stop breathing as well.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!